Private banking - or the more widely used term 'wealth management' - was once the sleepy side of financial services. Not any more. Strong commodities prices and booming stock exchanges led to record levels of high net worth individuals last year, according to the annual report, World Wealth, compiled by Merrill Lynch and Cap Gemini, published in June.
The number of people with liquid assets of at least $1 million rose to 8.7 million, a rise of 6.5% on the year before. The total investable assets of these reached a mind-boggling $33.3 trillion. Merrill Lynch estimates the number of high net worth individuals will grow by 6.5% annually over the next five years.
Much of this money is being created in the Middle East on the back of high oil prices: according to the report, the number of high net worth individuals in this region grew by more than 10% in 2005. But buoyant economies in Asia and Russia, strong stock markets and thriving environments for investment banking, hedge funds and private equity are also creating significant wealth.
As a result, wealth managers are attracting significant inflows of cash in major financial centres such as London, New York and Hong Kong, as well as developing markets such as China and even India.
Demographics have also helped. "We are at the end of the baby boomers," says Andrew Fisher, former chief executive of Coutts and now chairman and chief executive of UK wealth manager JS&P Towry Law. "This is the largest group of people who are now at the peak of their earning power. They are flooding the market with assets."
Little surprise then that wealth managers of all shapes and sizes are investing heavily to service these investors. Stockbrokers, financial advisers, retail banks, investment banks, fund managers, private banks - even lawyers and accountants - are all proffering their services to the growing numbers of wealthy individuals.
Bankers say there are plenty of opportunities for wealth managers across all areas of the spectrum because no single group has a stranglehold on assets.
"In the UK, probably the three largest players have somewhere around an 8% market share. That means there is a lot of opportunity," explains Blake Shorthouse, managing director of wealth management in the UK at UBS.
At the top end of the scale, there has been continued growth in family offices, where individuals and families hire their own administrators, tax advisers and sometimes also portfolio managers to look after their financial affairs. These offices tend to be used by families with at least $20 million of assets.
Europe alone has about 2,500 family offices, according to research from private banking consultancy Scorpio Partnership, and this number is rising rapidly.
But for the major investment banks, wealth management has also become a welcome growth engine. In its latest second quarter results, Credit Suisse reported impressive inflows of Sfr16.5 billion ($13.5 billion) into its wealth management of business in just three months. Like its major rivals UBS and HSBC, Credit Suisse is investing heavily in its private banking operations.
Indeed, almost every single large financial institution has a strategy to grow its wealth management business. In most cases, this means banks are building sizeable presences where their clients are. "Generally, people are more confident investing in the country in which they live," says Perry Littleboy, marketing director of Coutts. "You tend to need to have a flagpole and products regulated by the local regulator."
In the Middle East, big names such as Standard Chartered, Morgan Stanley and HSBC have set up local operations chasing wealth created by the high oil price and billions of dollars of repatriated Arab money. In Asia, the big banks continue to bolster their local operations with hiring sprees.
Groups such as UBS, Citigroup and HSBC have all added to local staff levels to beef up their already strong presences in the region.
According to analysts at Bear Stearns, most of the major private banks have increased staff levels by between 4% and 15% annually in recent years.
In many cases, staff account for about half of all operational costs and so this global expansion is pushing up costs for the major players. Wealth managers also complain that it has become difficult to recruit quality individuals. In Singapore, where demand for staff is particularly strong, Credit Suisse has even set up a training school to help build up its local workforce.
For many bankers, the current heavy investment in wealth management operations is reminiscent of the late 1990s. However, when stock markets crashed, many banks cut back their investment. "Many are happy to dedicate huge amounts of resources in a bull market, but what happens when things turn down? Will these people still be in it for the long term?" asks Simon Philip, private client partner at Deloitte.
For potential clients, commitment is therefore a significant factor when selecting a wealth manager. But private banks are also having to adopt strategies to suit their individual clients. Part of this means many banks are turning to segmentation, so that clients of similar backgrounds and needs - for example, entrepreneurs - are assigned the same wealth managers.
Many private banks are also moving away from relative performance - where performance is closely tied to stock market benchmarks - and towards absolute returns in a bid to deliver positive returns year-on-year, regardless of market volatility.
"The core for most managed portfolios was equities and bonds, but the bear market changed people's perspectives," says Charles Smyth-Osbourne, head of UK private clients at wealth manager GAM. "The buzzword in investing has become absolute return: 10 years ago, hedge funds were used by only the very richest and the most adventurous private clients. Now it is coming right down the spectrum."
More private banks are also moving to multi-manager and 'open architecture' strategies, giving their investors access to fund managers beyond their home-grown stable.
This gives investors greater choice and reduces risk for wealth managers: if the performance of their home-grown funds falters, there is less likelihood that money will walk out the door. With billions of dollars invested in expansion of wealth management arms globally, this may prove a vital way to safeguard growing assets under management.
- Robert Budden is personal finance editor of the Financial Times.